EU looks at emergency bans on shorting

Radical new powers banning hedge funds from short selling or trading sovereign
debt insurance have been set out by the European Commission in the face of
increased political pressure to crack down on speculative trading.

A one-month public consultation was launched yesterday by the European Commission with plans to introduce proposals for a series of controversial new rules by September.

The document outlines emergency powers for market regulators to ban or curb short-selling and credit default swaps in the wake of Europe's debt crisis, with the actions co-ordinated by the European Securities and Markets Authority.

The consultation says that short-selling has been "used in an abusive fashion to drive down prices" and is partially responsible for destabilising financial markets and even national economies.

Last week French President Nicolas Sarkozy and German Chancellor Angela Merkel demanded the Commission act faster to combat financial speculation. Their call came after Germany banned "naked" short-selling on certain products. So-called naked trading involves investors taking positions on items they do not own or have guaranteed access.

The commission also suggests banning or restricting naked short-selling in general and makes it clear that naked credit default swap contracts should also be harder to transact.

Finally, the Commission sets out rules on increased transparency across all EU shares, sovereign bonds or, possibly, all financial instruments traded on EU-based markets. European markets chief Michel Barnier said the Commission would not shrink from the issue of short-selling. "Recent events have reconfirmed the importance of looking at this issue more closely," he said.

But key details – such as who would decide on whether an "emergency situation" existed – were not defined.

In a separate consultation also issued yesterday sought views on how best to regulate over-the-counter derivatives, or swaps.